UK Banks to be nationalized-their economy is plummeting out of control!

The UK is finally in disarray, GBP continues to be sold off. The nail in the coffin has come from the dovish comments from BOE’s Blanchflower, sating that ‘the UK recession may intensify significantly and it’s too early to gauge when the economy will start to recover. This is not the bottom; I expect the 1stQ to be worse than the 4th, probably significantly worse. I don’t see any signs of green shoots at the moment.’

The US$ is weaker the O/N trading session. Currently it is lower against 13 of the 16 most actively traded currencies, in another ‘whippy’ trading range.

Yesterday’s US housing data above anything else remains consistent. Another dismal print was achieved despite falling prices. Sales of previously owned US homes unexpectedly declined -5.3% to an annual rate of +4.49m units, the lowest print in a dozen years. This is once again strong evidence that the US housing slump is probably a long way from bottoming out. More disturbing is that the median prices have now declined 15% y/y to 6-year low. Interestingly distressed properties accounted for 45% of all sales. Analysts believe that investors may have been waiting for details of the US governments plans aimed at stemming foreclosures and declining home values. Obama’s initiatives to aid the housing problems and the economy may lift home re-sales by about +900k units according to some analysts. This of course would reduce the massive inventory issue and help prices, but, with the US unemployment rate expected to edge higher will remain the biggest threat to this scenario. With such a large inventory issue, prices can only go south for foreseeable future.

The US$ currently is lower against the EUR +0.22%, GBP +0.31%, CHF +0.23% and higher against JPY -0.19%. The commodity currencies are stronger this morning, CAD +0.05% and AUD +0.26%. As predicted oil settlement day on Tuesday was the ideal opportunity to sell the loonie. Risk aversion trading strategies dominated the CAD dollars downfall yesterday. The currency retreated -1.5% vs. its southern partner as investors sought sanctuary in the greenback after the release of the dismal US home re-sales data. Already this week Canadian retail sales fell at a pace that was double the expected decline in Dec. It was down -5.4% m/m, which translate to a -6.4% decline y/y (this is the largest contraction in 20-years and consistently widespread across all industries). Analysts are now embracing themselves for a larger hit to next weeks 4th Q GDP numbers. On the other hand these numbers provide further proof for Governor Carney at the BOC to justify slashing rates another 50 bps on Mar. 3rd (1%) as the Canadian economy deteriorates at a quickening pace. All we need is to see a consistent rally in stocks to get investors interested in ‘risk trades’ once again.

The Australasian currencies advanced in the O/N session as equity markets rallied after Obama and the Fed eased concerns that the government may nationalize certain financial institutions. It’s worth noting that both currencies, AUD and NZD, are trading near the highest levels in over a month vs. JPY on the back of Japan’s exports plunged 46% last month, thus widening its trade deficit. The AUD (0.6496) also got support after 4th Q wage growth surprised to the upside (+1.2% q/q), thus boosting the case for the RBA to slow the pace of interest-rate cuts (3.50%).

Crude is higher O/N ($43.10 up +60c). Crude aggressively advanced yesterday as US gas demand is now increasing. The black-stuff managed to peak at a 3-week high after the weekly report showed that US gas inventories fell as demand strengthened and refineries cut operating rates. Inventories plummeted – 3.32m barrels to +215.3m last week. More importantly consumption averaged +9m barrels a day over the last month, that’s up +1.7% y/y. Refineries are operating at 81.4% of capacity, down -0.9% w/w. Analysts also noted that many refineries had been shutting units for maintenance as demand slackened, now that demand is once again rising, units will have to be reopened. With gas prices so low it has only encouraged increased consumption. Historically oil companies often shut refinery units for maintenance in the first 2-months of the year as attention shifts away from heating oil and before gas use rises. Not unexpected, crude inventories rose +717k barrels to +351.3m vs. an expected +1.25m barrels. Year-to-date, crude is down 16%, for the past month speculators had bought into the theory that the substantial cuts undertaken by OPEC this year (who represent 40% of global supply) will eventually curb these surplus global inventories and bolster prices even further. US policy makers seem to be making an impact on the gold market; the yellow metal has managed to fall for a 3rd consecutive as investors become reassured that the recession will not be as deep or as long as previously thought, thus eroding the appeal of the commodity as an alternative investment ($946).

The Nikkei closed 7,457 down -3. The DAX index in Europe was at 3,885 up +39; the FTSE (UK) currently is 3,908 up +58. The early call for the open of key US indices is higher. The 10-year Treasury yields backed up 14bp yesterday (2.93%) and are little changed in the O/N session. Finally yesterday traders aggressively cheapened the US yield curve as the US government sold a record $32b 5-year notes and are preparing to issue another $22b 7-year notes today. They needed higher rates for investors to absorb so many products.

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